Workers will cut hours to avoid higher tax bands, warns Budget watchdog - as others turn down pay rises to avoid childcare cliff edge

Workers will cut their hours to avoid being dragged into higher tax bands, as the Government keeps the freeze on income tax thresholds until the end of the decade.That's according to the Budget watchdog's analysis of Labour's plans, which forecasts hundreds of thousands of hours will be cut every year due to a punishing stealth tax raid.Income tax thresholds have stayed at the same level since Rishi Sunak introduced a freeze in 2021. The Treasury has grown increasingly reliant on the revenues generated by frozen thresholds, which could bring in as much as £55billion a year by 2030.But the Office for Budget Responsibility (OBR) has warned of an 'adverse effect' on work incentives as it forecasts threshold freezes could decrease labour supply by 215,000 hours. The Chancellor's Budget kept the freeze on income tax thresholds until 2031 It will primarily be driven by parents nearing the £100,000 childcare cliff edge.Families with one parent earning over £100,000 lose their entitlement to 30 hours of free childcare and tax-free childcare, worth up to £2,000 per year, having already lost their claim to child benefit.Frozen income tax thresholds have compounded the issue as more parents' incomes rise above the £100,000 cliff edge.The OBR said 'it is possible that individuals earning above the £100,000 cut-off threshold have reduced their hours worked to receive the childcare benefit.'If the childcare threshold had increased in line with inflation since its introduction, it would have increased to around £137,000.Additionally, a parent earning £100,000 or more faces a 60 per cent marginal tax rate as the tax-free personal allowance starts to taper before it is wiped out entirely by £125,140.> The Chancellor promised 'breathing space' - who are the Budget's winners and losers?How do frozen income tax thresholds affect you?It's not just higher-earning parents that are affected by the threshold freeze. Its impact is felt across every tax bracket.The tax-free personal allowance has been stuck at £12,570 for five years, even as inflation climbs higher and wages grow to keep pace.If it had risen in line with inflation, it would be £16,080, according to the Daily Mail's analysis.You can see the effect of fiscal drag on your salary using our calculator below.Put in your current salary and the calculator will adjust it back using inflation. Or you can use your actual salary from each year and it will tell you how much extra tax you've paid. A 21-year-old working a 40-hour week on minimum wage – receiving a 3.9 per cent increase in the Budget to earn £27,456 - will pay £700 more in income tax this year, and £6,100 more by 2030, assuming their salary kept up with inflation.The same goes for the higher rate 40p threshold, currently £50,270, which if it had increased in line with inflation would currently be £64,480.Someone currently on the cusp of the higher rate tax band and earning £50,000, would pay £8,100 more by 2030 as they are dragged into a higher threshold.A worse hand has been dealt to those even further up the income scale, as the threshold for the 45p additional rate of income tax was cut by Jeremy Hunt from £150,000 to £125,140 from April 2023.If the additional rate threshold had increased with consumer prices index inflation, it would be £132,160 today and £135,920 by 2030-31.This fiscal drag compounded over the years has pulled millions more taxpayers into the higher and additional rate bands, leaving them paying thousands more a year.Forecasts show that by 2031-32, 6.7million more people will pay income tax and 5.4million more will be dragged into paying the higher rate than if the thresholds had risen in line with CPI.The UK's tax burden was already on track to hit record levels in the next few years, but the figure is now likely to peak even higher than was previously expected.The OBR forecasts the tax burden to 'increase sharply' from 36 per cent of GDP in 2025/26 to a record of 37.9 per cent in 2027/28, then continue to climb to reach a peak of 38.6 per cent of GDP in 2031/32.Some pensioners are shielded from income taxJohn Healey plans to raise the poorest pensioners' income tax threshold to £13,036, matching the full new state pension rate from next April.Those relying on just the state pension had been set to pay income tax on it for the first time from next April, as the annual amount would breach the income tax threshold of £12,570.But there are concerns this might only apply to under-75s on the new state pension, and could exclude older pensioners who are on the old, pre-2016 system.The scheme, which would cost £200million a year by 2030 according to a report in The Times, could therefore create a 'two-tier' system, a former pensions minister has said.> Poorest pensioners let off income tax under new rules SAVE MONEY, MAKE MONEYUp to £300 cashbackUp to £300 cashback£25-£300 cashback on at least £3004.87% cash Isa4.87% cash IsaTrading 212: 1.27% fixed 12-month bonus£2,500 cashback£2,500 cashback£250-£2,500 cashback when opening SippUp to £150 cashbackUp to £150 cashbackOpen a savings account with at least £5,000Welcome bonusWelcome bonusGet up to £200 when you invest £100Affiliate links: If you take out a product This is Money may earn a commission. 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